Tax planning should be a year-round activity. But even as the year draws to a close, there’s still time to take some steps to reduce your tax bill. And there are even some things you can do after December 31.
Consider taking the following steps as you near the end of the year:
Decide if it makes sense to itemize. For 2019, the standard deduction is $24,400 for joint filers and $12,200 for single filers. For many people, it no longer makes sense to itemize, as the total of their itemized expenses for, for instance, medical care, itemizing may still make sense. And if itemizing will make sense, there may be some steps you can take by December 31 to maximize your itemized deductions, such as increasing your charitable donations.
Group together deductible expenses. If you’re incurring many medical expenses and can keep most within a single calendar year, you increase your chances of being able to meet the threshold for deducting them and —assuming that you’ll be itemizing — reap a tax benefit. For 2019, you can deduct eligible medical expenses that tip 10% of your adjusted gross income. If it looks like you’ll exceed the threshold, see if there are any additional medical expenses you can squeeze in before year-end that you otherwise might hold off on until next years, such as dental work or new prescription eyeglasses.
Stash as much as you can in your employer-sponsored retirement plan. Qualified contributions to these accounts can both boost your balances and lower your tax bill. For 2019, you can contribute up to $19,000 in a 401(k) plan; if you’re age 50 or older, you can contribute an extra $6,000.
The deadline for contributions to a 401(k) plan is December 31. But if you want to increase your 2019 contributions, you’ll need to take steps sooner so that they can be deducted no later than your last paycheck for the year.
While most tax-saving steps must be taken during the tax year, there are a few exceptions:
Contribute to an IRA. You can make a 2019 IRA contribution until April 15, 2020, tax filing deadline. The 2019 contribution limit is $6,000, plus another $1,000 if you’re 50 or older. (The deductible amount will be reduced or eliminated if you or your spouse participates in an employer-sponsored retirement plan and your income exceeds certain limits.)
Determine whether a Roth IRA makes sense. Contributions to Roth IRAs are made in after-tax dollars. While you won’t enjoy a 2019 tax deduction, you’ll owe no taxes when you take qualified distributions. With today’s generally low-income tax rates, it may make sense to forgo a tax deduction now to take advantage of a Roth IRA’s tax advantages during retirement. The 2019 contribution limits and deadline are the same as for traditional IRAs, though the contribution limit applies on a combined basis; that is, your total contributions to traditional and Roth IRAs can’t exceed $6,000, or $7,000 if you’re 50 or older. (If your income exceeds certain limits, your ability to contribute to a Roth IRA will be reduced or eliminated.)
Contribute to a Health Savings Account (HSA). As with IRAs, you can make 2019 HSA contributions until the 2019 tax filing deadline of April 15, 2020. The contributions are pretax or tax-deductible, and withdrawals used for qualified health expenses are tax-free. For 2019, taxpayers with an individual health care coverage HSA can contribute $3,500 ($4,500 if you’re age 55 or older), while taxpayers with family coverage can contribute $7,000 ($8,000 for those age 55 and older). To contribute to an HSA, you must participate in a high-deductible health plan.
Consider a SEP plan. You may have the opportunity to contribute to a Simplified Employee Pension (SEP) plan. If you have self-employment income, determine whether SEP plan is appropriate for you. The generous deadline is the day your tax return is due — including the extension. Thus, unlike with contributions to your IRA and HSA, you can extend the SEP plan contribution due date by extending your return.
Organization is key
Now is also a great time to begin getting organized for tax filing season. Gather documentation on your income and expenses, as well as on any credits or deduction you plan to claim. You want to be able to show that you legitimately qualify for them. Your accounting professional can provide additional information to help you reduce your taxes and navigate tax filing season with minimal headaches.
Connor Mullen, CPA
After graduating from Creighton University, Connor joined Hancock & Dana in 2012. He holds a degree in Accounting and specializes in estate and tax planning, working with clients to successfully minimize their current and future tax burdens.